Category: IPO/FPO ANALYSIS

Opportunities provided in IPO and FPO situations are analysed

Bharti Infratel IPO: Aggressive offering of Passive Infrastructure: Invest

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SUMMARY

  • Date: Dec 6th 2012
  • Offering: Price Range Rs 210 – 240
  • Issue Period:  Dec 11 – 14
  • Retail gets an additional discount

Description: Bharti Infratel runs the tower network for Airtel, and also partners for this with Vodaphone and Idea. The business is sticky in terms of customers and has stable cash flows. The telecom sector is at an early stage of growth in India. Risks: The business is capital intensive. There is regulatory and litigation uncertainty. BIL has only recently turned Free Cash Flow positive. Opinion: BIL has the leadership and first mover advantage. The aggressive pricing may be justified by high growth, good financials, and resurgent industry. Invest for the long term, at Cut Off price.

Bharti Infratel – Description and Profile

  • Bharti Infratel (BIL) was started in 2006 as the tower subsidiary of Bharti Airtel. Revenues in FY12 were Rs 9597 crores with PAT 751 cr. Operating & profit margins are 38% & 7.8%.
  • BIL owns 33,000 towers, and holds 42% stake in Indus Towers, which has 110,000 towers. BIL thus owns 80,656 towers, a 21% share of the tower industry (and a combined 143,300 and 38%).
  • BIL, along with Indus, currently employ 2521 staff directly, and 5659 indirectly. Operations are spread across all 22 Telecom circles of India.
  • Currently Airtel owns about 86.1% of BIL, and PE firms 13.9%, see Fig 1. But Airtel will not sell any shares in IPO. So after the issue, its stake would fall to 79.4% and the PE firms will fall to 10.5%.
Fig 1 – Bharti Infratel Structure – Source Red Herring Prospectus

Fig 1 – Bharti Infratel Structure – Source Red Herring Prospectus

Why Is BIL going for an IPO?

The objects of the issue are:

  • Investments in Installation of 4,813 new towers – 1087 cr.
  • Upgradation and replacement on existing towers – 1214 cr.
  • Green initiatives at tower sites – 639 cr.
  • General corporate purpose and partial exit by investors Temasek Holding, Goldman Sachs, Anadale and Nomura – Over 1060 cr.

Soft Benefits:

  • In future Airtel can sell its shares and deleverage its stressed Balance Sheet.
  • Overall valuation of Airtel will get a boost on successful listing of BIL, since it retains 79% ownership.

Telecom Industry

  • The Indian telecom industry revenue reached Rs 1,36,100 cr. by Mar’12, and the mobile subscriber base is around 91.9 cr. Of that number, approximately 86.8 cr. are 2G subscribers and 5.1 cr. 3G.
  • The industry has gone through phases. While the 1990-’99 phase was an introduction phase, the 2000-’10 period saw massive industry and subscriber growth. We are now in a phase of hyper competition /consolidation, where operators may reduce from 12-15 to 6-8. For details, see LINK.
  • The business model is based on leasing of towers by service providers on 10-15 year contracts. There is customer stickiness and the revenue model is stable.
  • The total number of towers today is 376,000, and the Tower tenancy average rate for the industry is 1.7. BIL enjoys a higher tenancy of 1.9. The 1.7 – 1.8 range is considered the break-even point. Tenancies for independent telcos are estimated at around 1.46 times.
Fig 2 Industry Towers and Tenancy, Source Red Herring Prospectus

Fig 2 Industry Towers and Tenancy, Source RHP

  •  BIL is a pioneer in the industry as it initiated co-operation and alliances in the telecom towers industry. As a result, from being a competitive scenario, industry players were able to grow tower numbers rapidly and at the same time reduce costs of this critical infrastructure by sharing.
  • Airtel along with partners Vodaphone and Idea together having 68% of the mobile market by Revenue Market Share. They are also incumbents growing fastest. Thus BIL is in the safest position in the industry in the form of market share, growth prospects and revenue stability.
  • The key drivers for tower and tenancy growth will be: 1) Rural 2G expansion 2) new 3G capacity 3) Usage of higher frequencies 1800MHZ+ which is more tower intensive and 4) new 4G coverage.
  • Operating Costs structure of industry indicates that 50% of Opex is Energy, of which again 60% is Diesel costs. This is a risk as there is a good chance Diesel prices may be raised as it is subsidized.
  • Companies also face several barriers in the form of the complex and time-consuming approval process for the deployment of new towers, and public fear of radiation from current towers.
  • Industry players include Indus towers (109k towers), Reliance Infratel (50k), Bharti Infratel (33k), Viom Networks (42k), GTL Infra (33k), ATC (10k), Tower Vision (8k) and Ascend Telecom.
  • There are significant entry barriers for new players as the business is capital & technology intensive.

BIL financials:

  • We can see at a glance that financials are good. Revenues, EBITDA and PAT have increased at 23%, 31% and 57% CAGR over the last 3 years.  Fig 3.
Fig 3: Bharti Infratel Financials, JainMatrix Investments

Fig 3: Bharti Infratel Financials, JainMatrix Investments

  • The Free Cash flow of BIL has improved a lot from FY09, and turned positive in FY12. Fig 4.
  • Low debt-equity ratio of 0.2 times.
Fig 4: Bharti Infratel - Free Cash Flows

Fig 4: Bharti Infratel – Free Cash Flows

Key Strengths of BIL

  • Pioneering status in industry. Largest market share in a high growth industry.
  • Sharp business focus on growth and maintenance of passive telecom infrastructure.
  • Stable long term revenue visibility; High tower tenancy at 1.9 compared to industry average of 1.7
  • Low debt-equity ratio of 0.2 times, and Positive Free Cash Flows of late

Key Weaknesses/ Issues/ Challenges of BIL

  •  It’s a capital intensive business. As of now, BIL’s RoE was low at 5.3% in FY12.
  • Diesel is key input, and prices can be raised unexpectedly.
  • Industry in a financially stressed condition, due to regulatory overhang, hyper completion and stabilizing of subscriber growth. There is an ongoing consolidation in the industry.
  • While market pressures have resulted in consecutive quarter-on-quarter reduction in profits for several  companies including Bharti Airtel, a recent SC order on telecom licenses has forced operators to go slow on rollouts, reducing business for tower providers.
  • Regulatory uncertainty: BIL’s operations may be affected if certain proposed regulatory measures with respect to tower sharing among service providers, etc. are implemented.

Strategic Thoughts around this IPO

  • Telecom is a key infrastructure for a country, and the availability drives individual and corporate productivity. The benefits of mobiles are massive, and have changed our way of doing things.
  • Even today India is at an early phase of telecom usage. While raw penetration numbers indicate a saturation level, the fact is that (as per TRAI data of Mar ‘12) urban wireless penetration was 162.8% while rural wireless penetration was 38.3%, indicating:
    • New connections growth will essentially happen in rural areas, with churn in urban areas.
    • Market maturity will start with urban areas, where newer data intensive apps and smartphones will drive demand and consumption of telecom services.
  • Bharti Airtel is approaching the markets to list a firm after 10 years. The firm through this period has set new standards of business innovation, transparency, shareholder rewards and growth.
  • BIL has a unique model of passive infrastructure sharing, and cooperation among competitors.

IPO Offering Outline and Valuations:

  • Offer is of 18.89 cr. shares in price range Rs 210-240 available from Dec 11-14th.
  • This 10% dilution will collect upto Rs 4530 cr, and value the firm at 45,000 cr. market cap.
  • Market Lot – 50 Equity Shares
  • Maximum Subscription Amount for Retail Investor – Rs. 2,00,000
Valuations based on FY12 financials

PE range, TTM

 

PEG range, TTM

Forward EV/ EBITDA

Valuation per tower
Bharti Infratel

53 – 60 times

0.93 to 1.07 times

9-10.5 times

50-57 lakhs
Comments Aggressive pricing, but IPOs from leaders come at high prices Indicates fair valuation compared to growth rates Is reported to be cheap compared to global peers Is cheap compared to stake sale deals done in 2009 (78L) and 2007 (120-160L).

Fig 5: Multiple Valuation approaches

  • We can see that the Per Tower valuation has fallen significantly from 2007-09 levels. This can be explained by the current ‘hyper-competition’ phase of this industry. This may ease off in 2-3 years.
  • The reported forward EV/EBITDA value claims to be cheaper than global peers. However it should be noted that the Indian industry is very different from these, both from a development phase and a technology point of view, so this is a weak input.
  • While the PE range of the offering is high, it is justified by the growth, giving a fair PEG value range.
  • CRISIL Research assigns IPO grade ‘4/5’ to Bharti Infratel, indicating ‘above average’ fundamentals.

Opinion, Outlook and Recommendation

  • Telecom as a sector is at an early stage of growth in India. For BIL, the business model while capital intensive, generates good cash flows. Utilisation and tenancy can only improve from here.
  • The pricing, while apparently aggressive, commands a leadership premium and reflects a first mover advantage. Bharti Infratel is a good long term investment opportunity.
  • Airtel has always been a favourite among the institutions. The recent surge of Airtel stock by 36% from its Aug’12 lows is at least partially due to news of the BIL IPO.
  • With the recent uptick in the indices, BIL looks set to capture the imagination of newer investors. There may be pop on listing.
  •  Invest for the long term, at Cut Off price.
  • Check back on the website www.jainmatrix.com for updates.

JainMatrix Knowledge Base:

  • CARE IPO – they do care about shareholders – LINK
  • Bharti Airtel – This is a year of consolidation – LINK
  • Telecom – Auctions speak louder than words – LINK
  • TBZ: A Glittering IPO Offer – Invest  – LINK
  • MCX – 800 pound Gorilla of Commodities; Invest – LINK

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/

Tara Jewels IPO: Rated Medium

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Post IPO news dated 23-Nov-2012

  • The news is that Tara Jewels IPO got subscribed 1.9 times.
  • The Retail and Qualified Institutional Investor portions got fully subscribed, while the HNI quota went over 3 times
  • Happy to note that my prediction yesterday turned out right :-)

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Investment Report dated 22-Nov-2012. 

Offering:  IPO is of Price Range Rs 225-230, open from Nov 21-23. 

Tara Jewels is a small cap Gems and Jewellery firm with a blended export plus domestic business plan. Tara has average financials, but is in a good industry. Offer is Fairly priced. Invest for a listing pop or for longer term of 3+ years. 

Tara Jewels – Description and Profile

  • Tara Jewels is a Mumbai based jewellery manufacturer with domestic and exports revenues.
  • Revenues in FY12 were Rs 1399 crores with PAT 56 cr. Operating and profit margins are 9.6% and 4%.
  • And growth figures of Revenues, EBITDA and PAT are 23%, 34% and 27% resp. CAGR for 5 years.
  • They employ 1738 staff. Manufacturing units are at Seepz Mumbai (3) and Panyu, China (1), while in India Tara has 30 retail outlets in West, North & Central regions.
  • Products include gold, platinum, and silver jewellery with studded precious (diamond) and semi-precious stones.
  • Exports are to well known retailers like Walmart, Zale, Sterling, Matsumoto, Signet, JKB, Dicia, JC Penny, etc. where products are sometimes co-branded; distribution is to 12,000 stores globally.
  • Tara promoter is Rajeev Sheth, a 31 year veteran of gems and jewellery.
Tara Jewels - Exports, JainMatrix Investments

Tara Jewels – Exports, JainMatrix Investments

Why Is Tara going for an IPO?

  • Repay expensive debt of Rs 50 cr. With the repayment, D/E will fall from current 2.14 to 1.3 times
  • Invest 67 cr. to extend domestic showroom strength from 30 to 50. The focus is on domestic market.
  • Exit route for an early investor Fabrikant H.K., which will net them Rs 70 cr.
  • Tara will also meet the listing norms where promoters can hold a maximum of 75% of shares.
Tara Jewels - Financials, JainMatrix Investments

Tara Jewels – Financials, JainMatrix Investments, Click to enlarge graphic

Industry

  • The overall size of domestic Gems and Jewellery sector is pegged at $30 billion (Rs 1,50,000 cr). The unorganised sector accounts for 90% of retail market in India, according to (CRISIL Research).
  • According to a FICCI-Technopak study this market is expected to grow up to Rs 183,200 crore by 2014-15, a CAGR of 10-12%.
  • Quick calculations give Tara a Market share of 1.2% of the organized Indian jewellery market.
  • Organized sector competition to Tara is from Titan, TBZ, Shree Ganesh, Joy Alukkas, Thangamayil and Kirtilal Kalidas, Reliance Jewels and Big Bazaar.

Key Strengths of Tara and IPO offer

  • Tara exports to a well known and prestigious group of Retailers.
  • Good industry experience from the first generation entrepreneur promoter.
  • The price volatility in this sector due to commodity inputs like gold and diamonds appears to be well managed by Tara in terms of their procurement systems.
  • IT systems appear to be strong, with a SAP implementation in place.
  • Integrated business model extending from manufacturing to exports to retailing.

 Key Weaknesses/ Issues/ Challenges of Tara and IPO offer

  • Domestic retail area is of approx 29,900 sqft, indicating sales of Rs 0.6 lakh per sqft per year. This compares unfavourably with Tribhovandas Bhimji Zaveri (Rs 2.35L), Tanishq (1.67L) and Gold Plus (1.05L). These chains are of a different scale nationally, but this is a negative for Tara.
  • Cash Flow negative due to investments in Retail operations and manufacturing. High debt that is going to reduce due to IPO, then increase again over next 2 years per business plans
  • Intense competition from both current organized and unorganized sector.
  • In exports, margins may be capped due to business to business nature of sales.
  • Capital intensive manufacturing and retail operations.
  • Government recently raised the duties on Gold imports, this raises cost of gold Jewellery. Another new rule is on the requirement of PAN number of buyer for purchases of more than Rs 5 lakh.

Strategic Thoughts around this IPO

  • The Tara IPO offer straddles a key trend – the transition of Indian Gems and Jewellery retail from unorganized to organized sector in India. This is expected to accelerate over the years.
  • This sector is part of the India consumption story. As India becomes both more populous and affluent, Gems and Jewellery sales are bound to multiply.
  • Exports have massive potential but margins may be restricted due to BtoB nature of sales. Volumes can be increased, but market conditions (except China) look poor.

IPO Offering Outline and Valuations:

  • Offer is of 180 lakh shares in price range Rs 225-230 available from Nov 21-23rd.
  • This 32% dilution will collect Rs 184 crores, and value the firm at 575 crores market cap.
Valuations\ Firm Tara (Post IPO) Titan TBZ Gitanjali Gems Rajesh Exports
P/E multiple 7.5 45.6 29.6 7.7 8.6
  • Tara valuation (PE) will be at 7.5 times trailing twelve months (TTM). It’s obvious that the domestic focused firms are awarded a steep valuation by the market, while the export focused are not that fortunate!!
  • CARE graded the IPO 3/5
  • The D/E ratio of the company will fall post IPO.
  • Ahead of the IPO, the company has allotted shares worth over Rs 26 cr. to two anchor investors at a reported Rs 225 per share.

Opinion, Outlook and Recommendation

  • The business model is export focused and here the prospects are good only in the long term. Domestic business is fair now, and requires investments and time to mature.
  • This is a Medium investment opportunity. There may be pop on listing due to a paucity of IPO offerings, Retail interest and a brave promoter.
  • Investors for the longer term 3+ years, will be rewarded once the domestic plans fructify and the exports markets emerge from recession.
  • A 16% subscription by EoD 22nd does not mean this IPO will not do well. There is very often a last day surge. I expect oversubscription.

 JainMatrix Knowledge Base:

  • TBZ: A Glittering IPO Offer – Invest  – LINK
  • MCX – 800 pound Gorilla of Commodities; Invest – LINK
  • Titan Industries – The Jewel in the Crown

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

SMFL IPO: Complex Auto Conglomerate, Retail can Avoid

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  • Date: May 3, 2012
  • Offering:  IPO is of Price Range Rs 113-118, available from May 2-4
  • Description: SMFL is a mid sized Auto ancilliary firm with a complex Private Equity style business model
  • Opinion: Retail investors need to avoid the IPO

SMFL – Description and Profile

  • Samvardhana Motherson Finance is into Auto components design/ manufacture. It is the holding company of the Samvardhana Motherson Group, started in 1975 by Chairman & ED V.C. Sehgal. Group turnover is 13,500 crores, and SMFL revenue 8,300 cr. (FY11).
  • The group is growing organic/ inorganically into an integrated autocomp supplier.
  • In Dec’11, SMFL had 18 Subsidiaries, 19 JVs and 86 other Consolidated Entities. Top holdings, along with SMFL stake and the Revenue contribution are:
    • Motherson Sumi Systems (Listed) – MSSL – 36.12 % stake, 51.2% revenues
    • Samvardhana Motherson Reflectec (SMR) – 63% stake, 33.7% revenues
    • Samvardhana Motherson Peguform (49% stake) contributed 10%.
  • The products suite includes wiring harness, polymer processing, rear-view vision systems, dropdown cabins, metalworking and elastomers. Mfg locations number 120 including 48 abroad.
  • Customers include the Volkswagen Group, BMW, Daimler, Renault Nissan, Ford India, Volvo Car, Maruti Suzuki, Tata Motors, Honda Siel, Toyoto-Kirloskar, etc. They are spread over 25 countries, and in FY12, 76.6% of income was from abroad.
  • About 4% of revenues are from non-auto industry like mfg of cabins for off-highway vehicles, refrigeration systems, and IT and engineering/ design services.

To understand this IPO offer, let us first review the listed group company, MSSL for its business and share performance. See Fig 1.

Motherson Sumi Systems – Financial Snapshot

A 5-year view of the share price of Motherson Sumi Systems in Fig1 shows us:

Motherson Sumi Systems Stock Price, JainMatrix Investments

Fig 1 – Motherson Sumi Systems Stock Price

  • Share price has risen 19% per annum over 5 years. Current market cap is 6700 cr.
Motherson Sumi, JainMatrix Investments

Fig 2 – Motherson Sumi, JainMatrix Investments

  • Revenues appreciated – Fig2 – by 41% CAGR, due to both acquisitions and organic growth. P/E has been in the 12-24 times range. EPS has grown, except for FY12.
  • The FY12 loss was on account of currency fluctuations and acquisition expenses.
  • In short, MSSL has been a good investment over the last 5 years.

SMFL – Financial Snapshot

Samvardhana Motherson Finance, JainMatrix Investments

Fig 3 – Samvardhana Motherson Finance, JainMatrix Investments

  • We can see, while revenues have grown rapidly, profitability has been lumpy.

IPO Offering Outline and Valuations:

  • The offer is of 14.7 crore shares in price range Rs 113-118, from May 2-4
  • The 25% dilution will get Rs 1665 cr. at upper end, for a 6930-cr market cap.
  • With the firm showing losses in FY12, the PE valuation is meaningless. The Price to Book ratio is 3.7, which is 40% lower than that of MSSL, and in the range of Bharat Forge (3.8) and Exide (3.3).
  • ICRA graded the IPO 4/5, indicating above-average fundamentals

Why Is SMFL going for an IPO?

  • The money raised will be used for the following:
    • Pre & repayment of debt availed by SMFL and subsidiaries – Rs 338 cr
    • Investments in SM Polymers (JV) & SM Holding (Subsidiary) – Rs 627 cr
    • Investments in Rear View Vision systems business – Rs 156 cr
    • General corporate purpose – Rs 222 cr
    • Reduction in holdings, by Promoter firm Radha Rani Holdings – Rs 321 cr.
  • The recent acquisition of Peguform has pushed up debt. D/E is at 2.7 times from 0.7 times in previous years. The IPO proceeds will be used to reduce this.
  • SMFL will meet the new listing norms as promoters will have < 75% stake.

Industry Overview

  • India is developing as an important Auto demand & supply center. For small and fuel efficient cars, India leads with R&D and mfg excellence from firms like Maruti, Hyundai and Tata Motors – JLR.
  • Firms like Bharat Forge, Exide, Amtek and the SMG are the Ancillaries support firms in this space. As per CRISIL Research there are over 46 Indian firms of turnover > 500 cr.
  • CRISIL Research projects domestic autocomp mfg. at 14-16% CAGR from 2011-16.
  • Quick calculations give the SMG a rough Market share of 7.4% with SMFL at 4.5% of the Indian autocomp market.

Key Strengths of SMFL and IPO offer

  • Motherson group is an established firm in the autocomp space. The first generation entrepreneur promoter has strong industry experience.
  • MSSL is a listed entity since many years, and has provided good return to investors.
  • The Autocomp sector is cyclical in nature, but is now coming out of a trough, and the outlook over the next few years looks positive
  • Multiple technologies, partnerships and mfg facilities provide a big growth opportunity.
  • SMFL has already raised Rs 222 cr. through issue of shares to four anchor investors – the Govt. of Singapore, Royal Bank of Scotland, US-based IVY Pacific Opportunities Fund and Birla Sun Life.

Key Weaknesses/ Issues/ Challenges of SMFL and IPO offer

  • SMFL is a holding company with a very complex clutch of JVs and subsidiaries. While we can sense the opportunity in the sector, a Valuation of the group and projection of growth is very difficult.
  • Future prospects of the group are embedded within multiple firms, and will be unlocked only on internal exploitation of synergies, successful integration of acquisitions and coordinated marketing.
  • Current revenue concentration is Europe centric (50%) with a poor economic outlook there.
  • The current plunge in profits is another sign of this risky M&A model
  • Will this firm transition from a Family business to a professionally managed one? As SMFL grows from mid cap to large, this may be required to manage a complex global business.

Opinion, Outlook and Recommendation

  • The IPO was subscribed only 9% till EOD 3rd May. This is not a good sign, and the firm may struggle to attain the numbers on the final day. Also there may be no pop on listing.
  • The business model of SMFL is like that of Private Equity, with multiple acquisitions and integrations. Profitability is currently 1-2 years away.
  • Retail investors should not enter into such businesses as this is a high risk model, with very unsteady financials and long gestation investments.
  • Retail investors interested in the group can either enter MSSL, or watch the SMFL listed stock for 4-6 quarters and enter once the business stabilises.

JainMatrix Knowledge Base:

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Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

TBZ: A Glittering IPO Offer – Invest

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  • Date: April 25, 2012
  • Offering: IPO is of Price Range Rs 120 – 126, available from April 24 – 26
  • Description: TBZ is a small cap sized domestic Gems and Jewellery firm with big growth plans
  • Opinion: Strong Brand and fast expansion likely. Fairly priced. Invest.

TBZ – Description and Profile

  • Tribhovandas Bhimji Zaveri Ltd (TBZ) is an established Mumbai based Jewellery retailer.
  • Incorporated in 1949, TBZ has 14 showrooms in 10 cities, and 1,192 full-time employees. It’s a primarily domestic business. Only two of the showrooms are owned; the rest are leased.
  • Jewellery Product lines include Gold Jewellery (72.5%), diamond studded (22%), Platinum and Jadau (5.5%). Manufacturing of Diamond studded Jewellery is at a 17k sq ft factory at Kandivili, Mumbai.
  • Promoters are Shrikant Zaveri (2nd gen. entrepreneur) and daughters Binaisha and Raashi Zaveri
  • FY11 revenues were 1149 cr, PAT 404 cr, and recent Operating margins were 9.3%
  • In five years, sales growth of gold jewellery is 8%  (CAGR) and diamond 38%
  • Showroom area is of approx 48,818 sqft, indicating sales of Rs 2.35 L/sq ft per year. This compares favorably with Tanishq (1.67L) and Gold Plus (1.05L). These chains are of a different scale nationally, but this is till positive for TBZ.
  • TBZ offers the Kalpavruksha Plan, a retail Installment based purchase plan. This helps ease the payment pressures for large buys.

Personal Notes: A visit to a TBZ is a treat by itself. The ambience is plush, the salespersons are courteous, knowledgeable and helpful. The jewellery is beautiful and expensive. As I leave, I say to myself – ‘I’ll come back here when it’s a big occasion, and I’m ready to spend a lot’ :-)

Why Is TBZ going for an IPO?

  • The Business plan is to open an additional 43 showrooms (25 large format high street showrooms and 18 small format high street showrooms) by end FY15, which would give a total of 57 showrooms (with a total carpet area of approx. 150,000 sq. ft.) in 43 cities.
  • From a strong regional player, TBZ is embarking on an aggressive phase of growth to take the business national.
  • TBZ will also meet the new listing norms where promoters can hold a maximum of 75% of shares.
Tribhovandas Bhimji Zaveri, IPO, JainMatrix Investments

TBZ Financials

Industry

  • The overall size of domestic Gems and Jewellery sector is pegged at Rs 87,000 crore as of 2008-09, according to a FICCI-Technopak study and is expected to grow up to Rs 183,200 crore by 2014-15, a CAGR of 10-12%. Estimates are that only 10% of this industry is the organized sector.
  • Quick calculations give TBZ a rough Market share of 8.5% of the organized Indian jewellery market.
  • Organized sector competition to TBZ is from Titan, Shree Ganesh, Joy Alukkas, Thangamayil and Kirtilal Kalidas, Reliance Jewels and Big Bazaar. However, TBZ’s business model is closest to Titan.
  • Government recently raised the duties on Gold imports, this raises cost of gold Jewellery. Another new rule is on the requirement of PAN number for purchases of more than Rs 5 lakh.

Key Strengths of TBZ and IPO offer

  • TBZ is a local trusted high quality brand, and can be leveraged by the firm.
  • Strong industry experience from the 2nd generation entrepreneur promoter.
  • The price volatility in this sector due to commodity inputs like gold and diamonds appears to be well managed by TBZ in terms of their procurement systems.
  • IT systems appear to be strong
  • Current operations are Cash Flow positive.

Key Weaknesses/ Issues/ Challenges

  • An unknown is the ability to scale up the Retail presence to 4 times the current size in 3 years.
  • Intense competition from both current organized and unorganized sector
  • Will this firm transition from a Family business to a professionally managed one? This is not necessary immediately, but definitely if TBZ grows from small cap to mid cap, it may be required.

Strategic Thoughts around this IPO

  • The TBZ IPO offer straddles a key trend – the transition of Indian Gems and Jewellery retail from unorganized to organized sector in India. This is expected to accelerate over the years.
  • Consumption trends. This business is part of the India consumption story. As India becomes both more populous and affluent, Gems and Jewellery sales are bound to multiply.
  • Looking beyond Gems/Jewellery, the consumption theme has been rewarded in FMCG, Food, consumer goods, and auto categories where PEs are high.

IPO Offering Outline and Valuations

  • Offer is of 1.66 crore shares in price range Rs 120 to Rs 126/- available from April 24-26th.
  • This 25% dilution will collect Rs 210 crores at upper end, and value the firm at 840 crores market cap
  • TBZ valuation (PE) will be at 12.46 times at the upper end of price band. This compares favorably with Titan (39X) but is higher than Gitanjali Gems (11X), Thangamayil (4X) and Shree Ganesh (2.68X). However, TBZ business model is closest to Titan.
  • Crisil graded the IPO 3/5, citing reasons related more to the industry competition than the company
  • The IPO proceeds will be used for opening new showrooms and working capital requirements and debt reduction.
  • The D/E ratio of the company was 1.5 as on Dec 31 ‘11, will come down to 1.1 post IPO.

Opinion, Outlook and Recommendation

  • This is a good investment opportunity. I expect this IPO to be a success and get oversubscribed. Also there should be an appreciation of the share on listing.
  • TBZ is an IPO for the medium risk oriented investor with a 2-3 year perspective
  • Interested investors should watch the subscription numbers till 25 April and take their decision.

JainMatrix Knowledge Base

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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NBCC: Small PSU Construction Sub-Contractor IPO, Avoid

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  • Report Date: 27th March
  • The updates of 26th EOD are: Overall 58% subscription with Retail 93% and Institutions 52% with FIIs also stepping in. HNIs are at only 3%. These  are not great numbers.
  • My sense is that HNI will dive in today only, and with Retail and Institutions doing their bit, subscription may go to 2-3 times. Of course this is crystal ball gazing :-)
  • If limited to 2-3 times, then the IPO may list at the lower end of range.
  • Retail applicants can apply accordingly.

Report Date: 24th March ’12

  • Offering: Price Range Rs 90-106, available  from Mar 22-27
  • Opinion: Government dependent,  long term outlook poor , Avoid

NBCC – Description and Profile

  • National Building Construction Co is owned by GoI /Ministry of Urban Dev.
  • It provides Project Management Consultancy (PMC) for civil construction projects for Central and State Govt, civil infrastructure for power sector and real estate. Nationwide spread of projects address sectors like Hospitals (customer ESIC), Education Institutes, roads, irrigation, border fencing, etc.
  • FY11 Revenues were Rs 3,127 crores, with Net Profit 140 cr and EPS 15.6. The net worth is 728 cr and it has an order book of over ~10,000 cr. Dividend yield is about 3-4% at current IPO pricing.
  • However NBCC is a small PSU as it is a Nodal agency that essentially subcontracts work to contractors like L&T, Ramky Infra, etc. Here NBCC has back to back payments to contractors  so that payments from customers are disbursed less margins. So debt is zero. Free cash on the books is 450 cr (35/share).
  • NBCC has maintained ROE and ROCE of about 20% & 33%, in the last 3 years.

Key Strengths of NBCC and IPO offer

  • The 3 years revenue visibility due to the order book is fine, and debt is zero.
  • All India presence, with some international operations starting up too.
  • The construction /infrastructure sectors are in a boom phase with terrific multi decade growth. The Indian government has placed infrastructure spending at a high importance, per Budgets/ Plans.
  • A number of government depts are comfortable dealing with a PSU, and place their orders with NBCC.
  • A discount of 5% on the Offer Price is being offered to Retail Bidders

Key Weaknesses of NBCC and IPO offer

  • As a nodal Agency, NBCC itself does not possess project execution capabilities.
  • The quality of output of NBCC is dependent upon subcontractors. In this current competitive phase for construction, top firms are ready to work for NBCC. Once these pressures ease up in the next 2-3 years, the quality will fall.
  • In the medium term current subcontractors will themselves take up projects directly from govt departments, and NBCC will lose business.
  • NBCC can be compared/ benchmarked against a number of firms. In Building construction, private sector firms are available at PEs ranging from 2-20 times with only larger high profile firms going over 6 times. In Civil Construction sector, large firms are in a range of 6-20 times, with the average at 14 times. Many firms in this sector are available cheaper than NBCC, offering ownership of a better business operation.

Strategic Thoughts around this IPO

  • My worry is whether the good-looking NBCC financials will hold up once it is a listed firm. The QoQ requirements of transparency of a listed firm are challenging, particularly for a govt department run PSU.
  • Why does the government need to do an IPO for NBCC? This Nodal agency for construction should continue doing its good work for government departments. Why should the unsuspecting public be offered ownership in this business? (One rumour is that the Indian Government is testing waters before larger IPOs. This firm is then a bad choice in my opinion).
  • In the 60s, the Indian government owned/ nationalized firms like Banks, LIC, SAIL, BHEL, BEL, Indian Railways etc. so that they can manage them and invest large amounts in new capacity (no one else could). Today the Indian government suffers from a monopolistic, legacy oriented thinking, and a mistrust of the private sector.
  • In these modern times, private operators are far more efficient, capable and technologically advanced than PSUs in the same sector. Private sector can invest in heavy industry. The government should in fact vacate from sectors where private sector can do a better job. NBCC is clearly in one such sector.
  • NBCC has a poor competitive position in the industry. In the next 5-10 years, it will lose its relevance, unless it learns to compete against the private sector firms, and execute projects end to end.
  • See my reports of other firms in this space – BGR Energy Systems and A Roads and Highways Developer (please Subscribe to receive this)

IPO Offering Outline:

  • Offer is of 1.2 crore equity shares for 10% of the firm’s equity, in price range Rs 90-106, available from Mar 22-27th.
  • At the upper end, this values the firm at P/E of 6.8 times, and it will collect 127 crores, and the market cap of the firm will be 1200 crores.
  • Rating agency CARE has assigned a grade 4/5 to the IPO.
  • As on 24th Mar, the issue is 23% subscribed, primarily by Domestic Institutions. One hopes this firm is not another one headed for LIC :-)

Opinion, Outlook and Recommendation

  • NBCC IPO is not for the long term investor
  • It is of course possible that NBCC may offer a listing pop.
  • Conservative investors looking for PSU firms and safety for next 1-2 years may like to Subscribe. Interested investors should watch the subscription numbers on 26 Mar and take their decision.
  • And check back on this website www.jainmatrix.com for updates :-)

Public Reports

For the benefit of my readers, I will share public reports on this IPO by brokers. Note that their opinions may be different from mine :-)

No   Report Link Opinion
1 Aditya Birla Money Link Subscribe for Short Term Gains
2 Hem Securities  Link Subscribe for limited upside
3 Edelweiss Subscribe
4 Swastika Investmart Link Subscribe for the long term
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MCX – 800 pound Gorilla of Commodities; Invest

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Update on Feb 28th – Stunning demand, low allotment, bullish signs

  Update: MCX got subscribed 54 times (4.5 till 2nd day), with QIB 49 times (3.68); HNI 150 (1.9) and Retail 24 (6.9). Allotment price has been fixed at 1032.

  • From a target of 663 crores, the process has generated 36,000 crores !!
  • I have to admit to readers that the response to the IPO was beyond my expectations. Particularly in HNI category, where everyone seems to have jumped in on the last day. This is bad news – as share allocation will vary from 10% to 0, giving very small absolute gains to investors.
  • Bullish sign: This late surge reminds me of the frothy periods in 2007 and 2010 when many IPOs were heavily oversubscribed. MCX shares is definitely going to take off on listing. This IPO will be remembered for signalling the start of the 2012 revival of Indian markets.

Update on Feb 24th

  • Today is the last day to apply for this IPO.
  • Update: MCX got subscribed 4.5 times till yesterday evening, with QIB 3.68 times; HNI 1.9 times and Retail 6.9 times.
  • My prediction that this offering will be oversubscribed seems to be true :-)
  • Strategy: Based on this data from yesterday, there are better chances of getting more shares in the HNI category than Retail. (Risk: this situation can reverse today)
  • The subscription limit  for Retail  is 2 lakhs; and >2L is category HNI.
  • I do not think there are any other issues/ challenges with applying under HNI. While applying, ensure you tick this category in the form. Before you proceed, do check if your Trading account supports HNI.
  • For Retail, to maximize subscription, bid for 192 shares at cut off (likely 1032) for a total application cost of Rs 1,98,144.
  • For HNI, work backwards from the total amount you wish to invest, over 2L, and calculate your number of shares applied for.
  • With high oversubscription, allotment expectations need to be lowered also :-(
  • Good luck !!

————————————————————

Report Date: 21st Feb ’12

  • Offering: Price Range Rs 860 to Rs 1032/-, available from Feb 22-24
  • Opinion: Very attractive offering, is likely to be oversubscribed, apply at upper end of range

Multi Commodity Exchange of India – MCX – Description and Profile

  • The MCX is an electronic commodity futures exchange, currently the largest Commodities Trading (CT) platform in India, with an 82% market share. MCX offers more than 40 commodities across segments such as bullion, ferrous /non-ferrous metals, energy, and a number of agri-commodities, for CT on its platform.
  • The Exchange is the world’s largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures
  • MCX has over 2,100 registered members operating over 247,000 terminals across India. MCX is the fifth largest CT exchange globally.
  • Other Indian exchanges are National Commodities & Derivatives Exchange (NCDEX), National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX) and ACE Derivatives & Commodities Exchange.

Promoter – Financial Technologies – Snapshot

  • Financial Technologies – FT – is a software/ exchanges/ ecosystem company promoted by Jignesh Shah. It is listed (Financial Technologies), and Market Cap is 4200 crores.
  • FT has started, promoted and spun off MCX, and is the largest shareholder. It also supports, maintains and develops the current software based platforms. About FT:
MCX IPO, JainMatrix Investments

Fig1 – Price 5 year view of MCX (click to enlarge)

  • The FT stock has been very volatile, rising to over 3000 compared to today’s 910, due to the excessive excitement around MCX, as well as the general market euphoria in FY 2007.
  • FT stock also fell in Dec 2011 to a low of 518, before recovering.  Revenues have been inconsistent also. But current price reflects a P/E of 53 times.
MCX IPO, JainMatrix Investments

Fig2 – Financials snapshot of FT (click to enlarge)

  • The PE is high because FT has been a very innovative company, to have created the MCX platform, and taken leadership position in a very knowledge intensive, and high potential industry of CT.
  • FT has also taken its capabilities to new markets, to set up a network of 10 exchanges and 5 ecosystem ventures, connecting growing economies of Africa, Middle-East, India and SouthEastAsia.

MCX – Financials

MCX IPO, JainMatrix Investments

Fig3 – Financials snapshot of MCX (click to enlarge)

  • A quick view of figures 2 & 3 reveals a transfer of business from Promoter FT to spin-off MCX. This is positive for the new entity.

IPO Offering Outline:

  • The MCX IPO is of 64.27 lakh equity shares (dilution of 12.6% post issue) for subscription during February 22-24, 2012. The exchange could raise Rs 663 crore at the upper end of the price band. (Mkt Cap 5100 crores)
  • IPO shares sale is by shareholders like FT, State Bank of India, GLG Financials Fund, Alexandra Mauritius, Corporation Bank, ICICI Lombard Gen. Insurance Co and Bank of Baroda.
  • There is no fresh issue of equity, so MCX will not get any money through this IPO.
  • CRISIL has assigned a grade 5/5 to the IPO, indicating strong fundamentals.
  • By current projections, IPO pricing PE ratio is 15 to 18 times of FY12 earnings.

Why does MCX need to do an IPO?

  • FT, the promoter, holds 31% in MCX, and has to dilute its stake to 26% in MCX to conform to guidelines prescribed by the commodity markets regulator, Forward Markets Commission. FMC is part of Ministry of Consumer Affairs, Government of India.
  • Other shareholders mentioned above are early investors looking for an exit route.

Was there any legal issue/ court case around MCX or FT?

  • FT/MCX have faced a series of litigations from SEBI, FMC, etc on aspects like corporate structure, Promoter holding and Trading permits. However these are mostly resolved. They were also necessary as a Commodities Trading platform in India is a critical infrastructure that can affect (and of course improve :-)) lives of crores of farmers/ agro based workers, commodity consumers, etc.
  • Other litigation pertain to transaction level issues, which are inevitable as trading and discipline are introduced into new sectors, new commodities and new producers and consumers.

Investors should look at the MCX IPO because:

  • MCX is available to investors at a PE of 15-18 compared to FT PE of 53. This is a massive discount. It is reasonable to expect the high PE of FT to rub off on MCX.
  • This is among the largest IPO offers in the last year. There has been an improvement in investment climate & sentiment in India from Dec’11. The IPO is testing this new investment climate.
  • It is believed that Retail as well as Institutional investors are waiting in the sidelines for good investment and entry opportunities.
  • MCX is a pioneer in a new industry, provides a critical infrastructure and is a good independent business opportunity. It has an innovative, fast growing platform that not just dominates India but also is in global top 3 in several commodity categories.
  • MCX has good management with global ambitions; firm is cash positive, profitable and growing fast. As a standalone entity it is attractive.

Risks:

  • FT should stay at arms length away from MCX and allow this firm to develop independently.
  • Government controlled sector. There are periodic bans on commodity exports. The Indian Govt should allow CT exchanges and market to grow.
  • Competition can intensify as some other firms have the backing of government, NSE, BSE, PSUs, etc.
  • My opinion is that Commodities trading should be restricted to Producers, Consumers, Institutions and professional / specialist investors. Retail investors without specialized knowledge may burn their fingers, and give the CT business bad publicity.

Opinion, Outlook and Recommendation

  • MCX is part of a new agri /commodities revolution in India, where trading can ‘disintermediate’ the commodities supply chain, reduce price inflation, enable better price realization for producers and reduce costs (and risks) in the system. That is if markets develop as expected :-).
  • MCX is the dominant leader in this emerging business. It has a good management with global ambitions.
  • The only reason for these discounts to be available to IPO investors is because MCX is testing troubled waters, as market sentiments have been poor in the past and some IPOs have even been cancelled recently. Also public resentment is high as IPOs from 2010/11 are running at discounts to IPO pricing.
  • This is a very attractive investment opportunity. I expect this IPO to be a big success and get heavily oversubscribed. Also there should be a good appreciation of the share on listing.
  • Conservative investors should watch subscriptions on 22-23 Feb and take a decision by 24th.
  • And check back on this website www.jainmatrix.com for updates :-)
  • More on the 800 pound gorilla ;-)

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L&T Finance Holdings – IPO – Invest

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Price band 51-59 ; Issue period Retail – July 27 – 29, 2011.        

(For a detailed note on L&T Finance Holdings IPO with analysis, business charts and IPO risks, subscribe for free to this blog, on the right panel)

Update on July 28th

  • On the second last day, the IPO has already been subscribed 1.21 times, with breakup of QIB (0.72), HNI (0.5), Retail (2.21), Employees (0.51) and Shareholders (0.96).
  • Retail has the highest oversubscription till now !! This is a new phenomenon. Looks like QIB’s are worried about USA’s debt problems, and a dull Sensex with an Interest Rate increase over last 2 days has affected overall demand.
  • The investment limit for Retail is Rs 2,00,000. If you want to maximise your subscription, bid for 3300 (33X100 lot size) shares at Cut Off for an investment of Rs 1,94,700.
  • Good luck !!

Report on July 25th

L&T Finance Holdings is a high quality NBFC offering. Buy with a 2-3 year investment perspective.

L&T Finance Holdings – Description and Profile

  • This is the first public issue from the house of L&T since the parent’s listing way back in 1950
  • L&T FH is the holding company for the financial services business of the L&T Group. L&T FH has four arms that manage the mutual fund, asset financing, infrastructure financing and working capital funding businesses. This includes firms like L&T Infrastructure Finance, L&T Finance, India Infrastructure Developers, L&T Investment Management and L&T Mutual Fund Trustees.
  • L&T FH plans to mobilize Rs 1,245 crore, for a 14.2% dilution (17% total dilution including pre – IPO placement), valuing the firm at Rs 8,700 – 9900 crores.

L&T – Snapshot

  • L&T is a proxy for infrastructure, machinery and construction in India. The recent aggression and focus on core competence by management in the last decade has yielded results – of excellent growth and profits.
  • Over the last 10 years, L&T share has shown results:

–          Share price increased 48% CAGR

–          EPS has increased 31% CAGR

My conclusion is that L&T has rewarded shareholders over the years,  grown consistently and transparently, and built a good reputation. And this rubs off very positively on L&T FH.

L&T FH Financials

  • At Rs 59 (upper end of the price band), the L&T FH valuations are at 2.2 times the consolidated FY-11 book
  • The capital adequacy of L&T Finance and L&T Infrastructure Finance is 16.5 per cent.
  • Business Assets of L&T F and L&T IF combined are 11,491 crores as of Mar 2010; Assets have grown at 77% CAGR over the last 5 years
  • Combined PAT is 267 crores in Mar 2010; PAT has grown 62% in last 5 years
  • These high growth rates are expected to continue for many years, as Infrastructure spending in India is on the upswing.
  • Another attractive investment in this space is Yes Bank, see the report

IPO Offer:

  • The IPO price band is 51-59 per share; Issue period for Retail is July 27-29, 2011.
  • Investor categories includes – interestingly – Shareholders, in addition to the usual QIB, NII (HNI), Retail and Employees. Shareholders can decide if they wish to bid for shares under shareholder quota or Retail/HNI, as multiple bids may be rejected.
  • The purpose of the IPO is:
  • Retire Rs 345 crore of inter-corporate deposits. The inter-corporate deposit was taken from L&T to support the capital needs of its subsidiaries last fiscal.
  • To support capital adequacy ratio of its subsidiaries. Around Rs 570 crore would go to L&T Finance,and Rs 535 crore would be used for augmenting capital of L&T Infrastructure Finance.
  • P/E at upper end may be around 21 times.  The IPO has been rated – IPO GRADE 5 by the Agencies – CARE and ICRA, indicating superior fundamentals

Opinion, Outlook and Recommendation

  • All the large Capital Goods and Infrastructure firms worldwide have created finance arms/ tie-ups to bundle their product with financing. This provides a good synergy as the product is capital intensive e.g. GE Capital, Airbus and Boeing financial arms, etc.
  • The L&T Finance business will be better valued as an independent company, rather than as a mere subsidiary
  • L&T FH is well diversified as a firm, and is present in the high growth areas of Infrastructure financing and Rural development
  • The prospects for L&T are good over the next decade. L&T FH has strong synergies with the parent firm, and by independent listing, will be able to manage it’s capital needs and growth better
  • Invest with a 2-3 year horizon.
  • Check back on this website www.jainmatrix.com for updates

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These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/